Economy

Mel Watt: A New Captain For America's Housing Market

Rep. Mel Watt, D-N.C., listens as President Obama announces his nomination to head the Federal Housing Finance Agency. Watt was nominated in May, but Republicans blocked his confirmation until this week.

More than 90 percent of home mortgages flow through Fannie Mae, Freddie Mac and the Federal Housing Administration. Fannie and Freddie get to decide who can qualify and who can't for loans they guarantee. And they just got a new top boss.

Manuel Balce CenetaAP

Seven months after his was nominated, the U.S. Senate this week confirmed former Rep. Mel Watt, D-N.C., to head the agency that oversees Fannie Mae and Freddie Mac, the giant companies that control much of the mortgage market.

The vote occurred after Democrats changed the rules on filibusters — now the Senate can confirm presidential nominees with a simple majority.

For people who watch the U.S. housing market, Watt's confirmation is a very big deal that could mean easier credit.

Most Americans probably don't realize that these two hugely important companies, Fannie and Freddie, are actually controlled by a bureaucrat in a little office in Washington.

That one bureaucrat has a lot of influence when it comes to the housing market.

The Power Of The Job

Watt will now be heading up the FHFA. Most Americans probably couldn't tell you what that acronym stands for. It's the Federal Housing Finance Agency. It controls Fannie and Freddie. And that means it controls a lot.

More than 90 percent of all new mortgages in the United States flow through Fannie and Freddie (and the Federal Housing Administration). So these companies are vital. They control that massive river of money flowing into mortgages.

They get to decide who qualifies to buy a house or refinance and who doesn't.

They oversee hundreds of billions of dollars in mortgage investments.

Every major decision Fannie and Freddie make has to be approved by the head of the FHFA — soon to be Watt. Fannie and Freddie used to be big quasi-private companies with chief executive officers and shareholders who held stock in the companies. But then the housing market collapsed, and Fannie and Freddie needed a $200 billion bailout. Congress gave them punishing terms under the bailout that made the companies wards of the state. The government essentially took them over and their CEOs are controlled by the FHFA chief.

Shifting The Leverage

Edward DeMarco, the official who has been in charge of the FHFA, has been controversial. He locked horns with the Obama administration. The administration wanted to use Fannie and Freddie to help more Americans refinance after millions of them were stuck in high-interest-rate mortgages. Democrats said letting those homeowners refinance would help stimulate the economy. DeMarco was seen as dragging his feet or outright blocking some of those efforts.

Republicans see DeMarco differently. They think his approach has protected taxpayers. Fannie and Freddie ended up drawing down nearly $200 billion in bailout money from the Treasury. DeMarco wanted to get that money back, and he's done that. (Though under the terms of the bailout Fannie and Freddie don't technically get out from under their $200 billion debt since all those payments essentially are considered interest payments.)

Analysts say Watt is likely to have a different approach.

Policy analysts say that getting Watt confirmed was a key development for Democrats if they want a strong hand in crafting the future of the mortgage finance system. Watt's confirmation flips the leverage to favor Democrats instead of Republicans, the analysts say.

One example: DeMarco was starting to wind down Fannie and Freddie and tighten credit. Watt is expected to keep the money flowing more freely to the mortgage market. And that could give Democrats more time and leverage to push through reforms that they want.

Watt might also be more open to expanded initiatives to help homeowners who are struggling to make their mortgage payments.

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Transcript

DAVID GREENE, HOST:

That Defense Authorization Bill and also a bipartisan budget deal were not the only things Congress has been busy working on. You might remember the Democrats recently changed the rules on filibusters. Now the Senate can confirm presidential nominees with a simple majority, and this week they did that. Congressman Mel Watt is now confirmed to head the agency that controls Fannie Mae and Freddie Mac.

For people who watch the U.S. housing market, this is a very big deal. We've brought in NPR's economics correspondent Chris Arnold to talk more about it. Hey, Chris.

CHRIS ARNOLD, BYLINE: Hey, David.

GREENE: Chris, remind us if you can. Fannie and Freddie play a huge role in a lot of Americans' lives, especially Americans who are interested in owning a home. Remind us why they're so important.

ARNOLD: Right. Ninety percent of Americans who go to get a mortgage right now or to refinance, their application, their mortgage, it all flows through Fannie Mae and Freddie Mac. They guarantee mortgages. That's a crucial part of the process. So there's like this giant river of money flowing through Fannie and Freddie out into the country. That money gets used for home loans.

So whoever controls Fannie and Freddie, that's a very big deal.

GREENE: And we should remember, during the housing crisis the federal government takes them over, which really concentrated the power they have even more.

ARNOLD: Right. I mean, at least there were two companies before and they were run by CEOs. Now the CEOs are there but everything is controlled - and I think a lot of people don't realize this - by a single federal bureaucrat who sits in some little office in Washington. And the CEOs are sort of marionettes, you know, if you will, where any major decision they make has to be approved by this federal bureaucrat.

GREENE: All right. This federal bureaucrat is now going to be Congressman Mel Watt taking that job, heading something called the Federal Housing Finance Agency. What is that?

ARNOLD: Right. And don't worry if you don't know what that is but it's a very important agency because, well, like we said, it oversees all of this money moving through the economy.

GREENE: And who's had that job up until this point?

ARNOLD: A man named Edward DeMarco had that job. He is a controversial guy. He was a thorn in the side of the Obama administration. They wanted to use Fannie and Freddie post-bailout to help homeowners, basically. Said OK, look. Let's cut interest rates for people. That'll help them. They'll have more money to spend. That'll help the economy.

DeMarco said no. Republicans liked that because DeMarco wanted to save taxpayers money. He wanted to, you know, get all this - there was $200 billion that Fannie and Freddie had borrowed from the federal government. He wanted to get that paid back as a first priority. And he's actually done that. That money has been paid back.

GREENE: OK. So Republicans, you say, like DeMarco. He's getting the federal government a lot of their money back. Well, now that the Obama White House has their guy in this job, Mel Watt, how are things going to be different?

ARNOLD: Well, I talked to one person who is very close to the administration and people on the Hill. He's a deeply inside Washington policy guy in housing. He says this absolutely flips the leverage around, from favoring Republicans to favoring Democrats. And one good example of this is DeMarco was starting to wind down Fannie and Freddie and tighten credit, raise costs for homeowners.

He was putting them out of the mortgage business slowly. Mel Watt is not going to do that. There's going to be more time and less pressure on Democrats to compromise.